Table of Contents
A. Liquidity Ratio:
1. Current Ratio: The current ratio is a liquidity ratio that measures a company’s ability to meet its short-term obligations. The formula for the current ratio is:
Current Ratio = Current Assets / Current Liabilities
2. Quick Ratio: The quick ratio, also known as the acid-test ratio, is a liquidity ratio that measures a company’s ability to meet its short-term obligations with its most liquid assets. The formula for the quick ratio is:
Quick Ratio = (Current Assets – Inventory) / Current Liabilities
Illustration 1:
From the balance sheet calculate :
A) Current Ratio
B) Acid Test Ratio
Liabilities |
Amount in Rs. |
Assets |
Amount in Rs. |
9% Preference share capital |
5,00,000 |
Goodwill |
1,00,000 |
Equity Share Capital |
10,00,000 |
Land&Building |
6,50,000 |
8% debentures |
2,00,000 |
Plant |
8,00,000 |
Long-term Loan |
1,00,000 |
Furniture & Fixtures |
1,50,000 |
Bills Payable |
60,000 |
Bills Receivables |
70,000 |
Sundry Creditors |
70,000 |
Sundry Debtors |
90,000 |
Bank Overdraft |
30,000 |
Bank Balance |
45,000 |
Outstanding Expenses |
5,000 |
Short-Term Investment |
25,000 |
Prepaid Expenses |
5,000 |
||
Stock |
30,000 |
||
19,65,000 |
19,65,000 |
Solution:
A) Current Ratio = Current Assets / Current Liabilities
Current Assets = Rs. 70,000 + Rs. 90,000 + Rs. 45,000 + Rs. 25,000 + Rs.5,000 + Rs. 30,000
= Rs. 2,65,000
Current Liabilities = Rs. 60,000 + Rs. 70,000 + Rs. 30,000 + Rs. 5,000 +
= Rs. 1,65,000
Current Ratio = Rs. 2,65,000/ Rs. 1,65,000
= 1.61
B.Activity Ratio:
1. Inventory Turnover Ratio :
The Inventory Turnover Ratio is a financial metric used to measure a company’s efficiency in managing its stock or inventory. The formula for the Inventory Turnover Ratio is:
Inventory Turnover Ratio = Cost of Goods Sold (COGS) / Average Inventory
Inventory Turnover Ratio = Net Sales / Average Inventory
Inventory Turnover Ratio = Net Sales / Average Inventory at Selling Price
Illustration 1: The cost of goods sold by ABC Ltd. is Rs.5,00,000. The Opening stock/ Inventory is Rs. 40,000 and the closing Inventory is Rs.60,000 (at cost). Find out the inventory turnover ratio.
Solution: Inventory Turnover Ratio = Cost of Goods Sold (COGS) / Average Inventory
=[5,00,000/{(40,000+60,000)/2}]
= 5,00,000/50,000
= 10 Times
for Calculating Inventory Turnover ratio through Net Sales
The formula for calculating net sales is:
Net Sales = Gross Sales – (Sales Returns + Sales Allowances + Sales Discounts)
In other words, to calculate net sales, you start with the total revenue generated by the company (which is referred to as gross sales) and then subtract any sales returns (i.e., items returned by customers), sales allowances (i.e., adjustments made for defective or damaged goods), and sales discounts (i.e., reductions in price offered to customers).
The resulting figure represents the company’s net sales, which is the revenue that remains after all these deductions have been made.
C.Leverage Ratio
1. Debt Ratio :Debt Ratio = Total Debt / Total Assets
2. Debt-Equity Ratio :Debt-to-Equity Ratio = Total Debt / Total Equity
3. Capital Employed to Net Worth Ratio :
Capital Employed to Net Worth Ratio = Capital Employed / Net Worth
4. Total Liability to Total Assets Ratio: Total Liabilities to Total Assets Ratio = Total Liabilities / Total Assets
5. Fixed Assets to Share Holders Fund Ratio: Fixed Assets to Shareholders’ Funds Ratio = Fixed Assets / Shareholders’ Equity.